James Galbraith
economist; Lloyd M. Bentsen Jr. chair in government/business relations and professor of government, Lyndon B. Johnson School of Public Affairs, University of Texas at Austin
author of "Inequality and Instability: A Study of the World Economy Just Before the Great Crisis."

Transcript

11:06:54

MR. TOM GJELTENThanks for joining us. I'm Tom Gjelten sitting in for Diane Rehm. She'll be back on Monday. Inequality has always been a feature of the U.S. economy, but today the gap between rich and poor is growing and faster than ever. Today we'll be considering two very different perspectives on inequality, both of them very well argued.

11:07:15

MR. TOM GJELTENIt's a privilege for us to host this conversation. Joining me here in the studio is economist James Galbraith. He's the author of "Inequality and Instability: A Study of the World Economy Just Before the Great Crisis." Also here in the studio one of the sharpest economics writers around, David Wessel of The Wall Street Journal and from NPR's New York studio is former Bain Capital partner Edward Conard. His new book is "Unintended Consequences: Why Everything You've Been Told About the Economy is Wrong."

11:07:50

MR. TOM GJELTENYou can join our conversation. I'm sure this subject will provoke a lot of questions and comments. Call us at 1-800-433-8850. Send us an email at drshow@wamu.org. You, of course, can send us a tweet or join us on Facebook. Good morning, everyone.

11:08:11

MR. JAMES GALBRAITHGood morning.

11:08:11

MR. DAVID WESSELGood morning, Tom.

11:08:11

MR. EDWARD CONARDGood morning.

11:08:13

GJELTENWell, Edward in New York, let's begin with you. Inequality is a subject that undoubtedly is going to produce a lot of comments, as I say, or questions or concerns across the country. You have waded into this issue very boldly. You've written a book that is clearly accessible for a broad audience. You're coming on shows like this one. Is it your intent to really make a public argument here and can you lay out what it is?

11:08:48

CONARDSure and I'll make the argument. I will just step back and say the book is really a prescription for how to grow the economy and it makes recommendations for short-term changes as well as long-term changes. And one of the long-term changes it suggests is it cautions against lowering the payoffs for successful risk-taking in the United States because we've really been the world's leader in innovation. And I argue that that's good for the middle class and the working poor in the United States and throughout the world.

11:09:17

CONARDI could lay out the argument broadly. It'll take me a little bit of time to cover all the bases to be sure, but I think a lot of it depends on why you think inequality has been growing. And if you come to the conclusion that there really is no reason for it, other than a fortuitous alignment of the stars which is the way I would describe, say, Tim Noah's book, which is also out on this topic -- and I debated him earlier in the week. I think he's saying that they really haven't done anything to deserve their good fortune.

11:09:48

CONARDI make an argument that the economy today is very different than the economy of the 1950s and 1960s when we were capitalizing on material goods, like cars and electricity and mass markets and in those markets, you needed big companies to create manufacturing industries. You had to build a fleet of 250 million cars. You had to create a worldwide energy industry. You had to pave a million miles of roads. Those are big companies, big economies to scale, funding investments a lot more important than risk-taking.

11:10:21

CONARDIndividuals don't matter as much to the economy, to that structure of the economy. The structure of our unrealized investment opportunities today are represented by companies like Facebook and Google and Instagram where 13 people can create a billion dollars of value in two years. The importance of risk-taking and the innovation that it produces today is very, very different than it was in the economy in the '50s and '60s. And if you don't account for those changes, I think it leads you to a very different set of conclusions.

11:10:56

GJELTENWell, James Galbraith, if I can summarize what Edward said, both just now and in his book and in articles that he has written, what's important here is the capacity to innovate, to take risks. We need investment for that. We need private investment for that. Wealthy people provide that kind of investment and it's in that context that he's talking here about inequality.

11:11:18

GJELTENYou talk about it, inequality, in a different context. Every chapter in your book has the word inequality in it. You are really focused on what inequality means. Tell us what it means from your perspective.

11:11:31

GALBRAITHWell, my book is principally about establishing the facts of the case and trying to clarify what they are. And I would say that, in some respects, I think I may be closer to Mr. Conard than I am to Timothy Noah, insofar as I agree that in the United States, inequality has been largely driven by the rise of the financial sector and the things that it does. I think that is very clearly established by the evidence.

11:12:00

GALBRAITHAnd I also show that in the wider world, what happened in the financial, to the governance of finance, dominates the movement of inequality. So I think that it's very nice to get that clearly in focus.

11:12:14

GALBRAITHThe next question is what is the significance of this? I'm going to try out a new metaphor here, something that I haven't used before. But it seems to me a nice way to think about the importance of inequality is to, is the metaphor, it's similar to blood pressure. It is an indicator of your state of health. If it is too low, if it's zero, you're dead. If it's too low, you're sluggish. And then there's a healthy range in which you're operating normally.

11:12:42

GALBRAITHIf it gets too high, that is principally a sign of danger ahead and that is why my book is titled "Inequality and Instability." It seems to me that the principal thing that you learn from studying inequality measures is that when things appear to be going very well, but the blood pressure, that inequality measure, is going very high, you're heading for a crash. And we clearly have experienced that. So the question I would have going forward is whether Mr. Conard's analysis really applies to the modern post-crash world.

11:13:16

GJELTENWe're going to be focused on this issue throughout the hour, but just to remain grounded in facts here, David Wessel, what are the metrics, the latest metrics on inequality? Where does it stand? To what extent is it growing?

11:13:34

GJELTENJames Galbraith just said that you have to watch for it to go outside sort of the parameters of a healthy indicator. Where does it stand right now?

11:13:45

WESSELOne of the advantages of this particular conversation is on the facts about inequality. There really isn't much difference between Mr. Conard and Mr. Galbraith. It makes it easier to have a conversation. If you look at the gap between winners and losers in the labor market, say the people who have college degrees and the people who have just high school diplomas, it's widened quite a bit. It's not widening very much now, but it's wider than it's been for a long time.

11:14:11

WESSELIf you look at the share of income going to the people at the top 1 percent or the top one-tenth of a percent, there's a chart in the Conard book, and I'm sure there's one in the Galbraith book as well, you can see that it's extraordinary. A very small number of people are getting a big chunk of the income, levels that we haven't seen really since the late 1920s. And compared to most other developed countries, we have a large amount of our income and wealth concentrated in the hands of a few.

11:14:42

WESSELIn fact, in a lot of developing countries, it's just as bad. In some countries, there's more inequality, China for one. In others, Brazil for instance, it's been narrowing.

11:14:55

GJELTENWell, Edward Conard in New York, are you comfortable with the emphasis that we're putting on inequality here? What do you think is the significance of the figures that David Wessel just laid out about the growing inequality? Is it even relevant in your judgment?

11:15:11

CONARDWell, of course, it's relevant. It's something that we ought to look at carefully and that's why we're looking at it here today. I do go back to the point, though, that the blood pressure measures, it matters what the circumstances are. And so a blood pressure reading after you've been running a long marathon or something like that or a sprint, high blood pressure may be indicative of health and not the other way around.

11:15:35

CONARDAnd so I do think, for example, when you look at college graduates and what they have earned and the successful risk-takers who represent the 1 percent or the point one percent, we should recognize two things which have occurred. One is that spreadsheets and word processing and emails and internet content are extremely valuable to the most talented workers and it has a differential effect on their productivity relative to everyone else.

11:16:01

CONARDAnd at the same time, when you look at the structure of the unrealized investment opportunities, Facebook, Google, Instagram, you name it, there's enormous opportunity for those people to create value. And I think really what the question comes down to is do we have to pay them as much as they're getting paid in order to get them to take the risk to create these things that are very, very valuable for society and the world? And it's clear that those things have increased the growth rate and put more people in the world to work.

11:16:32

CONARDI think the question we're ultimately going to get to here, maybe sooner rather than later, we'll see, is do we really have to pay that much to get them to do it?

11:16:38

GJELTENAnd what's your answer to that?

11:16:40

CONARDI think that it's complicated, but I would say one of the things you would look at is do we have a shortage of talent? And I think the answer to that is, no, we have a surplus of talent. And there are a lot of people who are unwilling to get the training that's necessary to harvest the value that's there for us to get and they're unwilling to take the risk. And so I think when you look there, you'd say, hmm, you've got to scratch your head.

11:17:01

CONARDThe second thing I'd say is we look at the difference between the U.S., Europe and Japan. If we were close in our innovation, we might come to the conclusion that incentives don't really matter that much. But what we find is a great divergence between what the United States has been able to produce and what Europe and Japan have been able to produce.

11:17:18

CONARDAnd lastly, I'd say if you go to micro examples, you can look at the state lotteries, for example. We know that when the payoffs go up, people start taking a lot more risk. We know that in 2000 when internet valuations increased, people left great jobs for what seemed to me to be very risky internet endeavors. We know people were fixing up a lot of houses in 2007 when the prices rose.

11:17:44

CONARDWe know that people in India and China, who see a more prosperous future and a higher payoff for risk-taking, have really redoubled their efforts. We know that in the United States, the top 20 percent are one of the few people, aside from India and China, who have increased the number of hours they work when the hours have decreased in Europe and Japan. And ultimately I think once we debate the issue of whether you have to pay them or not, we can get to the second issue which is, is it good for the middle class and the working poor? And I think the data is quite clear that it is.

11:18:12

GJELTENOkay,. Edward Conard is a former managing director of Bain Capital. He's the author of the new book "Unintended Consequences: Why Everything You've Been Told About the Economy is Wrong," and his argument is that innovation and risk-taking are very important to economic growth in this country. If you want to have job creation, you have to reward the people that do the innovating and take the risks and that's why some people make a lot more than other people. If I've been unfair in characterizing his views, he'll correct me when I come back. Right now we're going to take a short break, stay tuned.

11:20:04

GJELTENWelcome back. I'm Tom Gjelten sitting in today for Diane Rehm. And the subject today is inequality in the economy and what are its effects. Is it an indication that people are being rewarded for taking risks or is it an indication of an unhealthy economy? Our guests are Edward Conard. He's former managing director of Bain Capital and the author of "Unintended Consequences: Why Everything You've Been Told About the Economy is Wrong."

11:20:32

GJELTENDavid Wessel, economics writer and editor of the Wall Street Journal and James Gilbraith. He's the author of "Inequality and Instability: A Study of the World Economy Just Before the Great Crisis." James, you just heard before the break Edward Conard lay out his view that it's important that people be rewarded for taking risks and innervating the return to the rest of us is great enough to justify the big income and rewards that they get. What do you say to that argument?

11:21:06

GALBRAITHI think Mr. Conard is talking about events that happened actually quite a long time ago now. If you look at the measurement of income inequality in the United States, I think you will find that it rises to a peak in the year 2000. That is the peak of the information technology boom. Those games were highly concentrated in the producers of that technology, plus the people who financed them.

11:21:30

GALBRAITHActually, if you just take out the incomes book in a handful of counties, New York, New York and Silicon Valley, Seattle, about half the rise in inequality in the country between counties goes away. It's a dramatically concentrated growth of incomes. The effect on the users of the technology is very different actually. It does not enhance their skills to be able to have access to all of these technologies. It makes life much easier.

11:21:54

GALBRAITHIt makes the use of these -- access to Word processing, spreadsheets, accounting and so on -- accessible to people with much less training that was required before. So, in fact, it does not increase the incomes of the users at all. But let's fast forward to what happened afterwards, to the housing debacle in 2004 up to 2007. In this period, you had people trying to make the same kind of money that they were making in the information technology boom when they were investing in businesses.

11:22:25

GALBRAITHBut instead they're investing in mortgages, particularly subprime mortgages. And the result was a disaster to the communities of America, many of which were destroyed, deeply, deeply damaged by the aftermath of this phenomenon and to the financial markets as a whole, which melted down when it became clear that a vast part of this, of the securitized products that were based on these mortgages were, in fact, garbage.

11:22:54

GALBRAITHAnd we have not recovered from that. I don't think we're going to recover from it anytime soon. So I think we can talk about inequality. Inequality is a very important concept. But we do have to distinguish between the differing phenomenon that can lead to rising inequality. Inequality rose in the run-up to the housing crash. It didn't rise as high as I think maybe as it did in 2000, but it rose. And it comes down again. It's a sign of the debacle.

11:23:24

GJELTENDavid Wessel, I want to keep the focus here on the broader reality that Americans are dealing with, which is, at this point, chronic high unemployment, sluggish economic growth. Do we have a good sense of why? What is your judgment about why this economic recovery has been so slow, why unemployment continues to be so high?

11:23:51

WESSELWell, the patient had a very severe heart attack, since we seem to be in the medical metaphor realm here. And the patient is out of intensive care, but is far from healthy. We had some preexisting problems. We had a long period of time in the 2000s when wages and incomes at the very middle of the middle class didn't rise very much for more than one reason. Some of it may have had to do with globalization. Some of it had to with this widening of inequality. Some of it may have had to do with the economy not being able to -- the economy changing faster than individual workers can change.

11:24:33

WESSELAnd now we're in a long period of recovery. History tells us that after you have an enormous financial shock like the one we had, it takes a long time to get better. And I think we're going through that now. There are people who argue that we don't have to settle for this. Paul Krugman, for instance, another person who has a book out, would argue that it's because our government, both the fiscal and monetary policy, are too stingy that we're settling for more unemployment than we need to do.

11:25:02

WESSELOther people argue that the shock to the system was so great that the risk takers are a little bit nervous and that there are not enough people, particularly in the small and medium business crowd who are willing to expand their employment and stuff. At this end, finally, you know, the rest of the world has not been helping us at the moment. Europe's not making things easy.

11:25:26

WESSELNot only are they in recession, and that means they buy less of our stuff, but people, in the back of their mind, particularly business people and investors remember how bad it can really be when things go wrong. And they're worried, I think, that Europe's going to do that to us again. So corporations have lots of cash in their book. Interest rates in the United States are very low. Banks have a lot of money that they just put back and deposited to Federal Reserve. And so it'll take us a long time to get out of this.

11:25:54

GJELTENEdward Conard, let's talk about some of these issues that these facts that David has highlighted. Corporations have a lot of cash right now. Americans seem to be much more reluctant to invest in stocks, in equities than they have in past years, and yet inequality is very high, growing at a faster rate than before. If there are so many rich people, why, in your explanation, are they so reluctant to invest?

11:26:24

CONARDSure. I'll go back and give my characterization of the financial crisis. I don't disagree with James or David, but I think it's important to give you my perspective because it's relevant to I think how we fix the economy in the short run. When you run a trade -- opening the borders to trade has been incredibly valuable to the United States. Why? Because we can't make for $20 what we can buy for a dollar.

11:26:48

CONARDWe can take those $19 and we can hire teachers and doctors and truck drivers and waitresses. We can't afford to waste that $19. But we know that the Chinese are very risk of our savers. And so rather than buying our goods, they buy government-guaranteed assets. So that pushes risk of our savers from government-guaranteed debt into the private sector where they shorten up the duration of their deposits.

11:27:11

CONARDThey want on-demand deposits. And we have very difficult problem of how do we recycle that money back into the economy, either as consumption or investment rather than having it sit idle unused. We came up with what we thought was an innovation. I will agree with James on this, it turns out not to be a very good innovation, which is we went to homeowners, often with poor credit ratings.

11:27:34

CONARDWe said the pricier house has gone up 30 percent or 20 percent. How would you like to borrow the equity and spend it? Now, we think that the banks were making no-money-down loans, but in fact through securitization they were finding investors largely to make the homeowners' down payment. And so, it didn't matter to the bank whether the homeowner was making the down payment or an institutional investor was buying subordinated tranches in the securitization and in effect making the homeowner's down payment.

11:28:00

CONARDAnd we did go on a large spending spree. We also increased investment, which I believe is not measured properly at the same time. But we used that capacity in that way. Our real estate didn't really rise that much more than much of the rest of the world. Ours is falling a lot more than the rest of the world. And when that happen, a 30-percent drop in real estate prices, institutional deposits withdrew from our banking system in the range of $1.5 trillion relative to the losses that have been suffered on lending, which is about $300 billion, according to the Federal Crisis Inquiry Commission.

11:28:36

CONARDMuch of it suffered by investors who were not in the banking system. And today, we wake up and we realize that there's enormous risk of damage from withdraws. And so, if we put that risk onto the banks, if we hold banks responsible for withdraws and not just loan losses, and we have to hold them 100 percent responsible for loan losses or they'll make unproductive loans. But if we hold them responsible withdraws, they have no choice but to leave the money sitting idle unused.

11:29:04

CONARDAnd it doesn't matter whether it's the lender who's doing that or it's the borrower who's doing that. And it's happening on both sides of the equation. When that money is hoarded and sits idle unused, we end with high unemployment, slow growth and we've seen this movie before. We saw it in the 1930s, we saw it in the 1990s in Japan, 10 years of lousy growth and high unemployment.

11:29:25

CONARDHave we done anything to fix the problem? No. We're addressing the wrong set of problems when it comes to the financial crisis. And I make two recommendations. One of the recommendations is...

11:29:33

GJELTENVery quick.

11:29:35

CONARD...quick kidding ourselves that the government is making guarantees and start charging the banks for guarantees and go to work on managing the moral hazard that surrounds that. And number two, we have to go to the Chinese in the short run and say rather than Paul Krugman's proposal, borrow money and spend it. From that we should go to them and say, we need you to buy our goods if you want to have access to our market.

11:29:53

CONARDWhat we don't need is more risk of our savings. Okay? We're flooded with risk of our savings and we have high unemployment. We're not going to suffer the high unemployment on your behalf.

11:30:01

GJELTENOkay, James Galbraith, let's keep the discussion as much as we can focused on issues that I think are understandable to people. And one of the points that David Wessel made is that investors right now are nervous, risk takers are nervous. What's your explanation for why we are not seeing more investment in equities or in any of the assets that are needed to propel the economy forward?

11:30:26

GALBRAITHWell, I think this is an area where getting the medical metaphor right is very helpful. David referred to a heart attack. A heart attack is an event with consequences. You have damage. You have time to recover if you are going to recover at all. You have a serious issue. After the last one, and the last one was in 1929, 1930, the banking system did not emerge as the dominate force in our economy for another 40 years. Not until the 1970s.

11:30:53

GALBRAITHWe're looking here at something, which has a very long recovery period, and only provided that you do the right things. We have not done those things. This is why I think the term stimulus is deeply misleading. And I part company with my friend Paul Krugman on this issue. Stimulus is something you give to a healthy organism to get it moving again. You don't give it to a heart attack victim.

11:31:16

GALBRAITHYou're just courting trouble that way. What you have to do is a profound structural reform. And as part of that, again, to take a difference with Mr. Conard, I think what we need to do is strengthen and not weaken the underlying social insurance and security programs that affect the broad majority of the population. That's the way forward now.

11:31:38

GJELTENJames, could you explain, you say that inequality is an unhealthy condition. Specifically you say it leads to instability. Could you explain why inequality destabilizes a society or an economy?

11:31:51

GALBRAITHWell, I think there are -- inequality is an indicator of forces that are destabilizing the society. In the instance that we're looking at in the United States in the 1990s when it rose to and passed peak, this is because the financial markets were driving the show to a greatly excessive extent. And what they were doing was inherently unsustainable. The inequality which is reflected in peoples income and their tax statements is a measure of that.

11:32:17

GALBRAITHWhen you have high inequality in wage structures -- and this is true in lots of places around the world -- what tends to happen is that people quit their very bad jobs, let's say jobs on the farm, and look for the small number of much better jobs in the city and you have a great deal of unemployment. This is something you can see in Europe, you can see it in China. It's a major phenomenon as the Chinese have integrated their internal market in the last 30 years.

11:32:41

GALBRAITHSo it seems to me, these are very general, very powerful forces once one understands them correctly. And inequality is a very useful way of coming to grips with them.

11:32:49

WESSELTom, can I ask Mr. Conard a question?

11:32:50

GJELTENYes, please do.

11:32:51

WESSELMr. Conard, can you imagine ever a society that has too much inequality?

11:32:59

CONARDOh, sure. I think if it's unearned, absolutely. And if it's being used against the middleclass and the working poor, say, to load taxes on them, sure. But I think when we make a comparison, say to the U.S. and Europe, I think we find two things. Is the 1 percent paying more taxes here or less taxes in Europe? I think they are paying a higher share here than they are in Europe. And similarly, when you say are we denying citizens government services?

11:33:25

CONARDIt's true that the Europeans provide more government services, but they also tax their middle class to pay for it. And so you don't find real world examples of it. Yes, there are theoretical examples to be sure. But you don't find real world examples that confirm the hypothesis that the 1 percent is able to use power here in the United States, at least currently, to do something that hasn't been done in Europe and Japan.

11:33:47

GJELTENWell, historically, there clearly have been many, many, many examples of excessive inequality in societies.

11:33:56

WESSELUnearned. Let me jump in on that.

11:33:57

CONARDYes, I agree. The question is whether we're at one now or not.

11:34:00

WESSELYes. I think one of the major problems we have in our country is with a very small number of very wealthy people at the top of the political system. You basically see a mechanism of control. Much too close a relationship between the financial sector and the government, much too powerful a presence of the extremely wealthy to the exclusion of the larger population in a way which was not true in the first half of the post-war period.

11:34:27

WESSELTo have a healthy democracy, the broad population has to have means of participation in it. It can't simply be run by rich guys who are taking advantage of enormous wealth to buy themselves influence and power.

11:34:39

GJELTENWell I'm going to depend on our listeners to keep this conversation grounded in terms that are not too esoteric and technical. And I'm going to go now to Michael who's on the line from Fayette, AL. Good morning. Michael, thanks for calling.

11:34:52

MICHAELGood morning, thanks big time for accepting my call. I have two questions about the origins of all this. Well, one is really about where the wealthy corporate executives who are supposedly creating all these new jobs -- at least that's what they say not only in secular talk radio, but unfortunately in Protestant radio are actually going. And I would love to hear the -- what is it called -- Wall Street Journal writer's answer to that one.

11:35:28

MICHAELFirst of all, is it true that much of this inequality actually happened not just because of the energy crisis in '73 and the resulting recession in '75, but also with banking lobbies, savings and loans, insurance company lobbies and, sadly, the payday loan, quick pass, quick loan places lobbying to dismantle protections and regulations begun by FDR in 1933? Sadly, as early as one of my heroes Jimmy Carter was president. And second...

11:36:10

GJELTENMichael, you know, I'm a little afraid that David Wessel of Wall Street Journal is going to forget the question you asked. So let's hold off...

11:36:16

MICHAELThe second question is, is it true that wealthy the CEOs and executives of the large Fortune 500 corporations -- I'm not getting after the entrepreneurs who founded the technology companies since 1975 for they actually created jobs. But are the CEOs and also entertainment celebrities but the CEOs of, like, the insider trades of the 1980s, are they socking away the profits that should go into creating more jobs?

11:36:52

GJELTENI'm going to cut you off right there, Michael. You've posed a question. I want to give David a chance.

11:36:57

WESSELI think that one of the reasons it's hard to talk about this is that people mean different things when they refer to inequality. And people mean different things when they say unearned, as Mr. Conard did. So, I'm going to take a slice of your question. Who are the people at the very top, right? And some of them are people who worked there 10 years ago. You know, Zuckerberg was at Harvard 10 years ago or 12 years ago and now he's at the very top.

11:37:21

WESSELSome of them are people who inherited wealth and you can argue whether that's unearned. Some of them are, as you point out, rock stars and ball players and investment bankers and lawyers. And so, some of them may not have actually created jobs and it's hard to distinguish sometimes who's creating a job and who isn't.

11:37:39

GJELTENAll right, and I think another point that Michael made is he wonders where all this money is going. We'll answer that when we come back. Stay tuned.

11:40:04

GJELTENWelcome back. I'm Tom Gjelten sitting in today for Diane Rehm. And we're talking about the distribution of income in our economy, in our society and what the consequences and the significance of it is with our guests. Edward Conard is at our NPR studio in New York. He's the author of "Unintended Consequences: Why Everything You've Been Told About the Economy is Wrong." He's a former partner at Bain Capital.

11:40:26

GJELTENAlso James Galbraith, an economist and professor of government at the University of Texas at Austin. His latest book is titled, "Inequality and Instability: A Study of the World Economy the Great Crisis," and David Wessel, the economics editor at the Wall Street Journal. He's the author of "In FED We Trust."

11:40:46

GJELTENI want to go to you first, James Galbraith. You know, one of the old principles that we've heard that I think Edward Conard has really highlighted is a rising tide lifts all boats. Obviously you would agree with that, but if the consequence of a rising tide is that everybody in absolute terms is better off does it matter if there's more inequality? If the overall welfare of the population including the poorest class, if they are better off does it really matter that the relative distribution of income has widen?

11:41:25

GALBRAITHIn a rising tide, all the boats rise at the same rate. The problem is that when you get to a storm it's the small boats that go down. And the big ones do just fine. And that's, I think, the issue that we face. Let me come back to this question of inequality in jobs, which was raised by the last questioner on the air. One of the things that I have in my book is a fairly careful study of that relationship.

11:41:49

GALBRAITHAnd it's important because we've been told that if you just let the labor market be completely unregulated and become highly unequal that that would be good for employment matching skills to technology. It turns out, in fact, that the evidence runs almost exactly counter to that. In Europe where there is a lot of difference in equality levels across countries the countries which have less inequality systematically have lower unemployment. And there are very good reasons why that's the case.

11:42:18

GALBRAITHAnd what's happened in Europe is that as the continent has become integrated you have to take account of the big differences between countries. So, effectively, inequality has gone up and the European unemployment rates have gone up right alongside. So again it's a measure of economic health. It has a lot to do with the efficiency of the system as a whole. If you keep inequality within decent limits, you can motivate everybody. You need some inequality for that. But you can also provide enough purchasing power at the bottom so that the tide stays reasonably calm.

11:42:52

GJELTENOf course, David, this isn't a great week to look at Europe as a beacon of economic activity.

11:42:56

WESSELNo, it certainly isn't. I think that there's another question here which is if inequality gets to the point where people at the bottom or the middle don't think they have a shot then they won't do what's necessary. Mr. Conard argues that it benefits the middle class and that's -- it helps frame the argument because it does put the onus where it ought to be. Is our economic system delivering the goods and services to the people in the middle class?

11:43:26

WESSELI think -- so there is a fear if people think that they don't have a shot then they won't go to college or they won't try and get that job. And there'll be despair. And I think there's some evidence of that. The number of people who are not looking for work is very high now by any historical measure. The second is a question of politics. If everybody believed what Mr. Conard wrote that would be one thing. If they don't believe it we may find them voting for people who pursue policies that he would find very uncomfortable.

11:43:57

WESSELIf people think they're not getting a fair shake, they will be attracted to politicians sometimes derided at populist. You can see some of this in Europe now who take the world in a direction very different than the one he prescribes.

11:44:11

GJELTENSo, Edward, very briefly, it obviously does matter what people think whether they are despairing that's important or whether they vote, as David suggested, for populist candidates people's perceptions matter.

11:44:24

CONARDYeah, I think people's perceptions matter, for sure. But I think what we really want to do is maximize the growth rate for the middle class and the working poor. That's the real objective and if you look at what the United States has accomplished since 1991 the U.S. grew 65 percent, France grew low 30's, Germany 20, Japan 16. We had a hundred million employees in the U.S. in the mid l980s. We added 40 million employees over that time period. That's a 40 percent increase.

11:44:52

CONARDThe other countries are in the 15 to 20 percent range. So I think what is really -- changes people's perceptions, what gets them optimistic about the future I go back to Friedman's book about the moral benefits of growth. That's what puts people to work.

11:45:06

GJELTENOkay, good enough. Okay, I want to go now back to our callers. Elizabeth is on the line from Moyock, N.C. Did I get that right, Elizabeth? Elizabeth, are you still with us? Sorry.

11:45:19

ELIZABETHMy comment is that when your guest talks about risk and reward that, yes, I think Americans do believe that if you make a risk you should be rewarded. However, what we got with the banks was that they took risk, they got rewarded and we were the ones that bailed them out. A lot of those bankers who were in charge took their bonuses. They did not lose. And that is where -- that is where, I think, most Americans see the inequality being a problem is that risk and reward is not -- it's not risk if you're not using your own money.

11:45:52

GJELTENExactly. David, that's a good point isn't it? I mean the whole history of this -- aftermath of this financial crisis doesn't exactly highlight how risky that behavior was.

11:46:01

WESSELNo, I think that the caller makes a good point. I mean, my favorite example is it seems that one way to get rich in America is to be a corporate CEO and get fired because then they pay you for poor performance. And so I think that to the extent that we don't have this, as the economists say the incentives lined up right, we got a big problem. If people take risks and they win the bet and they get the benefits and if they lose the bet the taxpayers get stuck with the bill, there's definitely something wrong with the system. And there was some of that during the crisis.

11:46:33

GJELTENLet's go now to Charlie who's on the line from Ann Arbor, Michigan. Good morning, Charlie, thanks for calling "The Diane Rehm Show."

11:46:39

CHARLIEThank you. I have a comment and question. First of all, we mentioned China. It seems to me as though our TARP money has been invested in China is one of our issues. The other one is that Robert Wright mentions that the reason that we haven't gotten out of our recession is that the top five percent has so much of the wealth that the rest of us don't have enough money to spend. And I find it ironic that (unintelligible) of the poor, to use P. J. O'Rourke, millionaires in the Senate and the others elected by the Cook money, I think that their fight over the debt ceiling has, in fact, established more questions among the ruling class than questions about healthcare or whatever.

11:47:21

GJELTENJames Galbraith, you have any response to that?

11:47:23

GALBRAITHI think one of the things we're going to see after the election, if not before, is a renewed attack on Social Security, Medicare and Medicaid. This would, if it is successful, further undermine the purchasing power of the broad American population and the remaining pillars of security that they have. It's a very important point that the health of our economy depends in part upon whether this population continues to be able to avoid poverty and to be -- so that people who are working also can feel that looking forward to old age they have some foundation for security that doesn't depend on the now vanished equity in their houses or the fate of their 401K.

11:48:07

GJELTENEdward Conard, James just mentioned the political situation. You've obviously worked closely with Mitt Romney over the years, a fellow partner with him at Bain Capital. I know some of your reviewers say that Mitt Romney essentially outsourced the writing of his business biography, his autobiography, to you. Can we make any judgments or come to any conclusions about Mitt Romney's view of what has to happen in the economy on the basis of what you've written in your book?

11:48:39

CONARDMitt has -- no, is the answer. I don't speak for Mitt. I speak for myself and what I wrote in the book. I think it's fair to say that at the broadest level does Mitt agree that risk taking and entrepreneurialism is critical to driving growth in the economy? Sure, I think he agrees. But when you drop down below that my book covers a lot of ground. It has provocative counterintuitive controversial points in the book. There's nobody who agrees with everything in the book except perhaps me.

11:49:07

WESSELPerhaps.

11:49:08

GJELTENDo you -- I take it that you would agree with Romney's critique of the Obama's Administration that his policies, his administration's policies, in one way or another have been responsible for sluggish economic growth and the slow rate of job creation. Is that something you would argue, as well?

11:49:26

CONARDSure, I would certainly agree that the uncertainty -- the threat of higher taxes and such have slowed the economy, but I think where I speak for myself here is I think that there's two fundamental issues that haven't been solved. One of those is we can't have the Chinese not buying our goods and only buying our assets at a time when we have way too much savings. We have to get those savings put back to work. And that's a chief part of the problem number one.

11:49:48

CONARDAnd two is we're going to be reluctant to put risk of our short term money to work if we have to recognize the high risk of damage from withdrawals. And until we fix those two problems I think we're going to suffer ten years of slow growth and high unemployment. I wouldn't say that Mitt agrees with that, but that would certainly be my critique of the Obama Administration. They haven't taken the bold action that's necessary to solve the short term problems.

11:50:11

GJELTENOkay, James Galbraith, you have a thought on that?

11:50:12

GALBRAITHI think the Chinese buy from us exactly what they require as many aircraft, as much wheat, as much coal. There's nothing much that we should expect from them in that respect. What we need to do is to use the resources that we have and take the fact that they aren't holding our paper as a given and, to some extent, as an advantage. And use those resources effectively in our own economy. The question, and here Mr. Conard and I simply disagree, is how best to do that.

11:50:40

GALBRAITHI think you need fundamentally to restructure the institutions that failed before President Obama took office. And I do have a criticism of the Obama Administration. They haven't moved effectively to achieve that, but they were handed a God awful mess by their predecessors and we just can't overlook the fact that it was 20 years in the making, essentially a policy of de-supervision and deregulation that led to disaster.

11:51:08

GJELTENAnd let's go now to David who's calling us this morning from Syracuse, N.Y. Good morning, David, thanks for calling "The Diane Rehm Show."

11:51:15

DAVIDGood morning. I'd like to make a somewhat larger point about this. We're discussing in fairly technical terms and fairly great detail the economy. I don't think we're asking ourselves the more fundamental question which is what do we want an economy for. Do we want to have a middle class or do we want something that would be more similar to most human societies in history where there is no middle class. There's an elite who run things economically, politically, militarily and so forth. And then there's everybody else.

11:51:49

DAVIDThe United States of America was founded and has been organized throughout its history to try to create a nation where everyone has a stake, everyone participates, everyone's a citizen. If we get an economy that is extremely unequal sooner or later it will work against that fundamental statement in the United States and the United States will cease to be the United States. We have a middle class today because we fixed this for a certain number of years after the Great Depression. Is the great recession in this economic crisis going to turn us into something else? You have to ask that question before you debate the technical things about whether rich people hire more poor people so that the tide raises all boats.

11:52:36

GJELTENOkay, thank you very much, David. I'm going to put that question to David Wessel, but before I do, speaking of the middle class, I want to refer to a post on our website from Bernie who says, "I'm always concerned about the poor. But if the middle class has seen income rise by 40 percent, what's the problem? I grew up in the '60s and '70s in a middle class family and there's no doubt that today's middle class has far more than we ever had. Why are the only figures for the top one percent widely quoted? And why is the 40 percent gain in middle class income ignored? Isn't this inequality obsession more hype than anything?"

11:53:12

WESSELWell, first of all, I think that there seems to be consensus here that part of the goal here is to raise living standards for the biggest number of people. And the argument is about the best way to do that. We are not going to have a society where everybody makes the same amount of money. That's just never going to happen. I think that the reason there's concern is that the incomes of the middle class have not been rising at the same rate, lately, as they did in the post war period.

11:53:40

WESSELAnd the question is, can we recover that.? The caller -- the emailer is correct, though, that sometimes we forget that people do have things that our parents didn't have. We have vaccines against diseases they didn't have. We have big screen TVs and we have cell phones so that anybody can call anybody at any moment of the day or night. And I think it's important to remember that sometimes the narrow discussion of income and equality where everything begins with a dollar sign can mislead us.

11:54:06

11:54:11

GALBRAITHI think the middle class was, in fact, a very good American invention. It's a tenuous invention, but it is the foundation of a successful society. It's what made us into the great country that we are. What the middle class has lost is not so much living standards it's the sense of security. It's the sense of stability going forward. The sense that they can, in fact, not at the grand level of the information technology entrepreneur, but at the ordinary level of daily life that they can take some risks and still come out okay in the end.

11:54:44

GALBRAITHThis is in severe danger. People's houses have collapsed in value. As I said before, they've lost in their retirement accounts. They are threatened on the few remaining pillars of stability and security that they have. That's the crisis that we face and that we need to deal with it seems to me.

11:55:00

GJELTENJames Galbraith, is author of "Inequality and Instability: A Study of the World Economy Just Before the Great Crisis." And I want to go back to the phones now to Rocko who is on the line from Edwardsville, Ill. Good morning, Rocko.

11:55:13

ROCKOGood afternoon, gentlemen, thank you for the discussion. I wanted to acknowledge that three problems that exist in the approach that Mr. Conard has taken is one, it presumes the current models are the only options.

11:55:27

GJELTENTwo?

11:55:27

ROCKOTwo, that it requires proving the negative.

11:55:32

GJELTENAnd three?

11:55:32

ROCKOAnd three is that it continues that prior philosophy in the face of the definition of insanity doing the same thing over expecting different results. I think we need to -- I'm asking a question here regarding how to obtain accountability on the part of capital developers, i.e., banks and companies.

11:55:53

GJELTENVery quick answer from you, Edward Conard.

11:55:56

CONARDYeah, I think we've run three real world examples, the U.S., Europe and Japan. And I don't even think it's a close call as to which one has been more successful for the middle class and the working poor, especially if you include the tens of millions of people we've employed offshore.

11:56:13

GJELTENWell, that's okay.

11:56:15

WESSELYou startled him with a short answer.

11:56:17

GJELTENYeah. No, you make very complicated arguments, but there you just summed it up very quickly and very effectively. Edward Conard is author of "Unintended Consequences: Why Everything You've Been Told About the Economy is Wrong." He's a former partner at Bain Capital which is where Mitt Romney also was a partner, although, Edward says this morning that he wrote this book not Mitt. And he is not speaking for Mitt Romney.

11:56:41

GJELTENWe've also been joined by James Galbraith, an economist and professor of government at the University of Texas at Austin. And his new book is called, "Inequality and Instability: A Study of the World Economy Just Before the Great Crisis." And you know, on our website, you can always see links to these books if you're interested more. Finally, David Wessel, the economics editor at the Wall Street Journal. His book is "In FED We Trust." Thanks for listening. I'm Tom Gjelten sitting in today for Diane Rehm.

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